Bank of America warns of rebalancing flow risks to US dollar

Bank of America released its estimate of rebalancing flows in the foreign exchange market at the end of the month, warning of large outflows from the US dollar into the euro and emerging market currencies, driven by strong stock performance and weak bond yields in November.

US stocks, which account for the largest share of global investment portfolios, rose 6% this month, while European stocks fell 3.2% and Chinese stocks fell 5.7%. US bonds saw a modest gain of 0.4%, in contrast to declines in bonds across Europe and Japan.

The gap between the performance of stocks prompted investors to rebalance their portfolios, leading to a large sell-off of US dollar assets as they adjusted their holdings to maintain a balanced currency mix.

“We are comfortable with tactically abandoning the US dollar’s ​​rise in the very near term amid signs of a reversal,” the bank added, citing lower US yields and seasonal factors, including US holidays.

The bank also pointed to potential inflows into the Swiss franc, driven by strong global equity gains. It highlighted the SNB’s large equity holdings, particularly in US stocks, as a factor that increases the Swiss franc’s sensitivity to end-of-month portfolio adjustments.

BA expects USD/CHF selling to dominate, which is closely linked to strong performance in equity indices such as the S&P 500.

While rebalancing inflows may temporarily weigh on the US dollar, BA noted that broader factors, such as US interest rates and central bank policies, will ultimately shape the currency’s longer-term trajectory.